Fiat Chrysler bets big on locally produced models, but competition is fierce

Fiat Chrysler Automobiles
NV Chief Executive
Sergio Marchionne,
an inveterate poker player, has placed a large pile of chips on China, putting hundreds of millions of dollars into expanding its popular Jeep brand in the world’s largest car market.

But falling prices, a surge in rival sport-utility vehicles coming to the market and Fiat Chrysler’s late start in the country mean it could be tough for the weakest of Detroit’s big three car makers to break through in the Asian giant.

At the centerpiece of Fiat Chrysler’s China strategy is a $750 million push to expand a local factory to make Jeeps that avoid the heavy duties imported models carry.

The effort is core to Mr. Marchionne’s attempt to shed Fiat Chrysler’s standing as the least profitable of big U.S. auto makers and comes just as Jeep’s U.S. sales begin to decline after several years of robust growth. Its adjusted operating margin in North America was 7.6% in the third quarter of last year, below General Motors Co.’s 11.2%. Similar figures for Fiat Chrysler China aren’t available.

“China is a critical part of the achievement of our 2018 objectives,”
Mike Manley,
head of the Jeep brand, said in an interview.

In spring 2016, Fiat Chrysler began producing the Renegade in China, which is priced at about 142,000 yuan ($20,500), and recently began offering a Chinese made Compass SUV, at about 170,000 yuan. It recently opened a design center in Shanghai and in late 2015 introduced a locally made Jeep Cherokee for 210,000 yuan. Since they are locally made, the new models avoid a 25% import duty.

Jeep appears to be carving a solid niche in the brutally competitive Chinese car market, where the rush to capitalize on the SUV craze has driven a glut of new models, including those from more than a dozen cheaper Chinese brands.

But Mr. Marchionne’s goal is much greater. He aims to more than triple Jeep sales in China by 2018 to 500,000, a jump it took
Volkswagen AG
a decade to achieve. Jeep’s volumes in China doubled in 2016 from a year earlier and topped 130,000 for all of 2016. But that gain followed a steep drop in 2015 as customers waited for the arrival of the cheaper, locally produced models. Mr. Marchionne will need to double China sales this year and again in 2018 to reach his goal.

That could prove tough. China’s car market, a land grab until recently, is saturated after tens of billions of dollars of investment by foreign car makers in the last decade. Sales volume is still growing, but largely thanks to a government tax break on vehicles with smaller engines slated to be reduced in 2017. Market researcher IHS Automotive expects sales to stagnate this year.

“Obviously, I would have liked to have been there [producing] in China five years ago, but we weren’t,” said Mr. Manley. But there is still some “healthy growth,” he said. “Our brands and our vehicles are in a good place to be able to compete.”

By some estimates, Jeep generates more than half of Fiat Chrysler’s profit and accounts for about two-thirds of its market capitalization, reflecting in part the group’s failure to expand its Fiat and Chrysler brands. A similar effort to expand Jeep sales in Russia has stalled.

In 1983, Jeep, which traces its roots to a vehicle supplied to the U.S. Army in World War II, became the first Western car maker to produce vehicles locally in China. But the foray almost immediately went badly: The first Chinese-made Cherokee had to be pushed off the line because the workers hadn’t properly connected the clutch. Production ceased in 2006, just before then-owner Chrysler Group LLC split from former parent
Daimler AG
.

Today, Fiat Chrysler is doing much better targeting drivers such as Wang Bingyi, a 37-year-old co-founder of a trendy clothing store in Shanghai. Jeep’s rugged reputation lured Mr. Wang, who dreams of driving his imported Jeep Wrangler on an ultimate Chinese road trip—the more than 2,500 miles to Tibet. “There is nothing like driving a Wrangler,” he said.

But finding lots of buyers like Mr. Wang won’t come easily. China market leader Volkswagen produces more than 20 models in the country, including six Audis. It plans to spend €18 billion ($18.8 billion) in the next several years and launch 10 new Chinese models. Volkswagen and GM each sold 3.6 million vehicles in China in 2015 and
Ford Motor Co.
sold one million, compared with 139,000 sold by Fiat Chrysler.

Now, GM, Volkswagen, Ford and other foreign car makers have lowered prices in China. According to Ford, the car industry cut prices 7% in the second half of 2015, and it expected to see similar cuts for 2016. PSA Groupe’s
Peugeot
is cutting costs by 20% in China to offset discounting.

Fiat Chrysler has about 400 dealers in China, mostly in bigger cities. While it plans to increase that to about 500 in the next several years, that still trails the 3,000 showrooms that VW has throughout the country.

“There are too many SUV products” being offered by auto makers in China, said Chen Gaoyang, a salesman in a Shanghai Fiat Chrysler dealership, which features multicolored banners celebrating the 75th anniversary and boasting of the Renegade’s sturdiness. “It’s much more difficult than before for us to sell them.”

“China has developed into one of the most competitive markets in the world,” said Mr. Manley. The pressure is so high that only 30% of dealers in China make money, compared with almost three out of four in 2010, according to the China Automobile Dealers Association.

—Rose Yu contributed to this article.

Corrections & Amplifications: Material contained in an earlier version of this article that was attributed to a Jeep salesman has been removed because the article, originally published Dec. 20, failed to inform readers that Lin Zhibin was a pseudonym for the source who provided sales data from a Shanghai dealership. In addition, Fiat Chrysler’s adjusted operating margin in North America was 7.6% in the third quarter. The article incorrectly said it was 7.3%. And according to Ford, the car industry in China cut vehicle prices 7% in the second half of 2015, and Ford expected to see similar cuts in the industry for 2016. The article incorrectly said that Ford had cut its own prices in China by 7% in 2015’s second half and 2016’s prices by a similar amount. A previous correction to this article regarding the salesman’s job title that was published on Dec. 28 also failed to note that he had been identified by a pseudonym. (Jan. 9)